In capitalism, the government’s role in creating new money is limited. It mostly moves around money that is already in the economy, funds itself by collecting taxes or selling government bonds, and then spends that money back into the economy. So most of the money the government touches is already in the economy.
Quantitative tightening (QT) is similar to what would happen if somebody who was paying your bills suddenly stopped doing so and started to reduce your bank account by the total amount of bills previously paid.
The European Central Bank, Sweden, Denmark, Switzerland, and Japan have all implemented some form of ‘negative interest.’ However, none of these countries or regions have seen commercial banks charging their customers for depositing money.[i]
There is no way to know for sure. Still, when the Fed adds money to the economy by buying bonds from non-banks, the stock market seems to go up. When they subtracted cash from the economy by not reinvesting mortgage payments (quantitative tightening), it went down.
In February of 2019, two months after telling the world that the Fed balance sheet reduction plan was on autopilot, Chairman Powell announced that the Fed would soon unveil a plan to end it
Does anybody know why the Federal Reserve is having such a hard time reducing the amount of mortgage-backed securities (MBS) on its balance sheet? Seven months into a plan where $36 billion should have been shrunk only $14 billion has
Regarding treasuries, Mr. Sheard is right: there is no reduction in the money supply when the Fed allows any of its $2.4 trillion of treasuries to roll off its balance sheet. The Fed merely debits the government’s checking account by the amount of any maturing bonds.
However, cutting taxes after a big buyer of our bonds walked away is precisely what is happening. The Federal Reserve stopped reinvesting in October and will continue doing so for the foreseeable future. Two months later in December, our representatives passed a massive tax cut.
